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Abstract

The transition is discussed from the perspectives of the Chinese reforms of the 1980s and the theory and experience of taxation and tax reform in developed and developing countries. The Chinese example is not a model for other countries, but has many lessons, positive and negative. For example: (i) the payoff to providing market incentives, households and small farms can be rapid and large, without immediate privatization; (ii) "limited private ownership" may be desirable and feasible in the transition; (iii) the building of the new institutions can be a lengthy process, as opposed to macro stabilization which can be done quickly. The transition requires a new social security system to replace that previously provided by rationed and subsidized "necessities" and by firms with their life-long employment. It also requires a new tax system to replace the reliance on enterprise profits. The "Western European" model has some rationale as a long-term goal in basic economic principles and experience at delivering the revenue. The tax system in transition may have to be rather different, however, from the long run. For example, it may be advisable to have: (i) wage or employment taxes as a precursor to the personal income tax; (ii) measures to correct errors generated elsewhere in the transition, such as gratuitous gains or losses; and (iii) measures to alleviate distortions in the nascent markets.

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